IC-DISC Resources

An IC-DISC can be formed at any time during the year. However, the IC-DISC tax savings can begin only after the date of incorporation, so the benefit is prospective only.

Form 4876-A generally needs to be filed within 90 days of the date of formation. If that deadline is missed, the IC-DISC can't be used for that tax year. However, if filed within 90 days of the first day of the subsequent tax year, it becomes effective for that year. If the deadline is missed entirely, it's possible to obtain Section 9100 relief, but that's an expensive process.

Yes. The IRS code is clear that cash or property must be paid from the operating company to the IC-DISC.

A reasonable estimate of the IC-DISC commission payment must be made within 60 days following the last day of the IC-DISC's tax year. At least 50% of the "finally determined" IC-DISC commission is a safe harbor amount. Any difference between the initial estimated payment and the final IC-DISC commission amount must be paid to the IC-DISC within 90 days of filing the 1120-IC-DISC tax return.

The 60-day rule requires that a reasonable estimate of the IC-DISC commission (at least 50% of the "finally determined" amount) be paid to the IC-DISC within 60 days following the last day of the tax year.

The 90-day rule requires that any remaining amount not paid under the 60-day rule be paid within 90 days of filing the 1120-IC-DISC tax return. Conversely, if the operating company overpaid the IC-DISC under the 60-day rule, the overpayment must be returned by the IC-DISC within that same 90-day window.

That depends on how important specialized expertise is to you. Although many CPA firms prepare 1120-IC-DISC tax returns, most prepare fewer than five per year. Because of that low volume, it's difficult for the firm to develop real expertise. Compare that to the hundreds of corporate returns and thousands of individual returns a typical CPA firm handles annually.

Because most CPA firms prepare so few IC-DISC returns, they typically can't justify investing the time and resources to build a dedicated IC-DISC practice. As a result, they usually lack the capability to perform a comprehensive transaction-by-transaction calculation (see the question below on "TxT" calculations).

Typically, no. The firm that prepares the return usually does not handle ongoing IC-DISC management. That responsibility falls to the company's accounting department, but because the IC-DISC has different requirements than standard 1120, 1120S, or 1065 returns, the accounting team is often unaware of what's required. Only a very small number of IC-DISC firms include ongoing management as part of their service.

Yes. We find that most "unmanaged" IC-DISCs are technically disqualified. If a disqualified IC-DISC were audited by the IRS, all commission calculations and the corresponding tax savings would be denied. The result: overdue taxes, plus penalties and interest.

The 1120-IC-DISC tax return is due on "the 15th day of the 9th month after its tax year ends." For a company with a 12/31 year-end, that means September 15th is the deadline. There is no extension option.

A Simple (or "Standard") calculation groups all export sales into a single pool and calculates the commission as the greater of 4% of qualified export receipts (limited by export income) or 50% of export income.

A TxT ("Transaction by Transaction" or "Advanced") calculation computes a commission on every line item of every invoice, then totals them. In addition to choosing the higher of the "4%" or "50%" method per transaction, there are 18 calculation methodologies that can be applied to each line item. Certain groupings can provide additional commission amounts as well.

When performed by an IC-DISC expert using specialized software, the average TxT calculation produces a commission 3 times greater than a Simple calculation, resulting in tax savings 3 times larger.

Although dozens of firms claim TxT capability, in our experience, fewer than a handful of firms in the entire country have the necessary skill, experience, and specialized IC-DISC software to perform a truly complete TxT calculation.

This can be confusing because it works as a "backwards" calculation. Say U.S. Company A buys raw material from Foreign Company C and turns it into a finished product sold to a foreign customer. Does it meet the 50% U.S. content test?

Here's an example: if Company A sells its product for $100, the product qualifies as long as it paid no more than $49.99 to the foreign supplier for the raw materials.

A direct export is when a U.S. company sells its product directly to a foreign customer.

An indirect export is when a U.S. company sells its product to another U.S. company, and that second company sells it to a foreign customer without any further U.S. manufacturing.

For example: U.S. Company A sells a product to Foreign Customer C (direct export). Or, U.S. Company A sells to U.S. Company B, which then sells the same product to Foreign Customer C. That's an indirect export for Company A and a direct export for Company B.

Not automatically. If a component part is sold to a U.S. buyer who further manufactures or incorporates that component into their own product, the sale doesn't qualify for IC-DISC benefits, even if it's technically an indirect export. A facts-and-circumstances analysis is usually necessary. This issue was addressed by the U.S. Supreme Court in the GE case.